It is common practice for parties entering outsourcing contracts to limit their liability to each other. However, one of the most common exclusions of the limitation on liability are damages caused by gross negligence or willful misconduct.

What constitutes gross negligence and willful misconduct? The definitions vary from state to state. Many times the determination of whether the conduct rises to these levels is based upon the specific facts of the case.

,The limitation of liability provision typically prevents one or both parties from being held liable for a variety of damages. It is also common for a cap to be placed on the total amount of damages either party can be held responsible for under the contract. Allocating risk in normal breach of contract matters is usually acceptable, but when a party acts with gross negligence or willful misconduct, it doesn’t make sense to limit recovery. In fact, there should be incentives for preventing such types of behavior.

You should confer with a business attorney regarding the law governing your contract and how gross negligence and willful misconduct are defined. Typically, gross negligence includes conduct that demonstrates “reckless indifference” or a “complete disregard” for the rights or safety of others. In other words, you must show a serious deviation from reasonable care. Willful misconduct usually involves a party acting or not acting in a situation where the act or inaction is clearly required. You should be able to show an intentional act of unreasonable character that resulted in foreseeable harm. As you can see, the standards for proving gross negligence and willful misconduct are very strict.

Most contracts provide that if gross negligence or willful misconduct occurs, the non-breaching party has the right to damages which can exceed any liability cap. A few examples of exclusions from limitations of liability include: